The Foshan Model

A Harbinger of China’s Future

精華簡文

Foshan in the Pearl River Delta has established itself as a testing ground for Xi Jinping’s economic policies as it moves up the value chain. How has it transformed its economic structure to emerge as a home to a cluster of hidden champions?

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A Harbinger of China’s Future

As the 19th National Congress of the Chinese Communist Party was opening in Beijing, the city of Foshan in Guangdong province was reveling in its earthshaking transformation.

Heavily polluting factories have been dismantled, and an “Industrial Design City” has sprouted up. Foshan-based Midea Group has bought leading German industrial robot powerhouse Kuka AG and introduced a large contingent of automated robots to the area. A spirit of craftsmanship has emerged as Foshan’s mainstream language, helping shape it as China’s industrial design and hidden champion capital.

The transformation’s significance stems in part from Foshan’s importance in China. Throughout the years, every Chinese leader from Deng Xiaoping, Jiang Zemin and Hu Jintao to Xi Jinping today has visited Foshan whenever touring southern China.

The second video in the series showcased Foshan as an example of a city that had undergone a successful economic transformation.

In a similar vein, a book titled “The Future of China: The Foshan Model” was published this year, co-authored by Yansheng Zhang, secretary-general of the Academic Committee of China’s National Development and Reform Commission, and Geng Xiao, a professor of practice in finance and public policy at the University of Hong Kong.

Foshan has attained a GDP of 860 billion renminbi (about NT$4 trillion) – ranking 15th among primary Chinese cities – despite having a population of only 7.5 million people.

Its per capita GDP is higher than that of Beijing and Shanghai.

In the “China Rich List” published by Hurun Report in 2017 (which lists people who have had more than 2 billion renminbi, or US$300 million, in wealth for five consecutive years), Foshan had 39 people on the list, the eighth most of any city in China.

“Most people think of Foshan as a place known for kung fu, and that outside of [famous martial artists] Yip Man and Wong Fei-hung it’s just a rural backwater. But Foshan’s economy is actually prosperous and strong,” says Stanley Liu, who heads the Junior Taiwanese Investor’s Association of Foshan.

Oliver Wang, chairman of the Association of Taiwan Investment Enterprises on the Mainland, first invested in a factory in Foshan in 1989 and has witnessed Foshan’s economic rise. His Agio Furniture Co. in Shunde has since emerged as a hidden champion in the global outdoor furniture market.

Many are under the impression that Deng Xiaoping only visited Shenzhen on his famous tour of southern China in 1992 to promote economic liberalization, but he also stopped in Shunde, Wang says. At the time, Deng proclaimed that “Shunde’s thinking should be a little more liberated and a little bolder and move at a slightly faster pace.”

Emboldened by Deng’s words, people in Shunde embraced the slogan “dare to be the first in the world” and boldly attempted to privatize government owned enterprises run at the town level. The best known case was China’s leading home appliance maker Midea Group.

Wang recalls that when he first arrived in Foshan, Midea was just a small home appliances factory located just next door to his facility. But “Midea relied on structural reform, going from a government enterprise to a private company. Add to that the aggressive pursuit of market opportunities by local people. Today, it is totally different,” Wang says.

The privatization of state-run enterprises has not been uncommon in China, but why was it so successful in Foshan?

Foshan Model: Strategy No. 2

Following the Rules, Taking a Longer View

Compared with Dongguan, a city located on the other side of the Pearl River where many Taiwanese-invested businesses are concentrated, Foshan has always focused on taking things slowly while Dongguan has stressed rapid growth.

Wang, whose production facilities can be found in major cities across China, pinpoints what makes Foshan stand out.

“Relatively speaking, Foshan is more law-abiding and takes a longer-term view of things. For example, according to regulations, if you want to open a factory, you have to buy land. Local enterprises are also encouraged to develop and build a home they can call their own together,” he says.

“Dongguan cares more about speed. To build a factory, you can rent rather than buy land, and you can take off quickly. But once various preferential conditions encouraging exports expire, factories can no longer survive and move away. Dongguan’s GDP can no longer match that of Foshan,” Wang adds.

Foshan Model: Strategy No. 3

The Spirit of Craftsmanship: One Town, One Specialty

Though Foshan as a whole has done well, its different districts have used different approaches to prosper. Entering Nanhai, for example, reveals a place completely different from Shunde.

“Shunde relies on large companies, while Nanhai has relied on groups of small and medium-sized enterprises to create tremendous value locally and develop a “one town, one specialty” approach, says Sony Liang, the president of the Junior Taiwanese Investor’s Association of Foshan Nanhai.

“For example, whole towns in Nanhai make only ceramics, textiles, metal manufacturing and auto parts, and its cluster advantages have spawned hidden champions in each domain. The many types of rescue vehicles produced in Nanhai, for example, are all No. 1 in China and the world,” he says.

Hidden champions generally keep a low profile, but they are quite powerful, and Foshan has been a logical breeding ground for them.

“People in Foshan look at things in depth rather than superficially. They are demanding when it comes to design and want products to be well made. They have the spirit of craftsmanship,” says Imp Chen, the director of Yueting Space Design in Foshan, a design company that often serves the area’s wealthy class and entrepreneurs.

Moving on from Nanhai toward the commercial area of Foshan’s Chancheng District, one passes by several old steel, furniture and ceramics clusters that have all moved away because of another key to Foshan’s success, the local government’s policy of “emptying the cage for new birds.”

Foshan Model: Secret No. 4

Ruthlessly ‘Emptying the Cage for New Birds’

“Foshan made its fortune on ceramics, but it still had the guts to get rid of the sector and move it to a remote suburb of the city,” says Livi Chung, the founder of Livi Chung Art Jewelry, referring to the closure of hundreds of ceramics companies that has left only 62 core ceramics businesses in place.

So what is meant by Foshan emptying the cage for new birds? At first it was a measure to improve the environment.

“Our factory had electroplating and powder coating operations, which came under stricter control,” Liang says.” “Especially in China in recent years, environmental testing technology has been upgraded, and wastewater discharge pipes and exhaust vents are now equipped with test instruments and sensors, using high-tech to monitor pollution more strictly and precisely.”

The tougher monitoring and controls were put in place to draw the line on polluting companies.

“It’s mainly targeted at companies that do not have factory permits [such as electro-plating and powder coating plants] and have not passed environmental assessments to obtain a pollutant discharge permit,” Liang says. “Those who don’t meet the standards are closed. Those who do are not affected.”

Foshan Model: Strategy No. 5

Building Value through Design, Smart Manufacturing

In eliminating outdated sectors and bringing in new ones, Foshan has also sought to promote smart manufacturing. Stanley Liu notes that Foshan generally did not welcome the machinery industry in the past but has now put it at the top of its wish list, encouraging the adoption of artificial intelligence.

Liu said his factory has developed automated equipment that can be remotely controlled by a smartphone and that uses artificial vision to check the quality of the zippers it produces.

Another sector receiving strong support in Foshan is the design industry. Soon after he took over as head of China’s State Council and general secretary of the Communist Party in 2012, Xi Jinping went on a southern tour of his own that followed Deng’s old route. One of his stops was at the Guangdong Industrial Design City in Foshan, where he said: “I hope Foshan becomes a design city and Foshan’s manufacturing becomes Foshan design. I also hope that the next time I come to Foshan that the Guangdong Industrial Design City will have 8,000 designers.”

It’s a direction that Foshan hopes will move the city away from low-cost manufacturing and spawn more design-oriented companies that can charge higher unit prices for goods.

Oliver Wang has followed such a model in his own business, nurturing a big team of designers who come up with 200-300 new items a year for customers to choose from. The items chosen are the ones produced.

Wang’s company also has set up an exclusivity system, under which he offers exclusive designs to clients, and if a client agrees to market one of them, the company guarantees it will only be made for that client and nobody else. As a result, Wang’s dinner table sets are not cheap and can sell for US$2,000 (about NT$60,000), bucking China’s image as a manufacturer of low-cost goods.

Behind Foshan’s efforts to modernize its industrial base is the sense that companies should go back to square one if they cannot upgrade their businesses.

Henry Lin, who founded Ding Wang Textile and is the CEO of Ding Wang Center, did exactly that, shutting down his textile fiber factory in Foshan to invest in the service sector.

Lin was originally a senior executive with Far Eastern Textile, one of Taiwan’s biggest textile enterprises, before setting off on his own in 2000. After buying a textile fiber plant in Foshan, his business saw smooth sailing until the city announced its policy to “empty the cage for new birds.” That sent labor costs soaring, putting the survival of the fiber plant in jeopardy.

“I was determined to start over. I concentrated my textile fiber production in Jiangsu to rely on economies of scale to stay competitive and moved into the service sector on the Foshan facility’s land, building a shopping mall and apartment building,” he says.

Foshan has dared to abandon the highly polluting ceramics industry that made it wealthy to reinvent itself as a cluster of hidden champions. It has also injected heavy doses of industrial design and robots into the mix to promote design and smart manufacturing, creating value and raising people’s incomes. In doing so, the city has asserted itself as a testing ground for implementing “Xi Jinping Thought” and now represents the new model for China’s future economic development.